Thread by @BambroughKevin

My thoughts on why the US Dollar will soon loose its status as a reserve currency and just a couple of the huge consequences
#usd #usdollar #economy #trade #china #currency #gold #inflation #HardLessons #LivingWage

I delved into global macro economics in the late 1990's and invested in the 2000-2010 commodity boom in large part based on my belief in China's and India's economy booming and their demand growth taking off. The resource bear market looked to be ending & US tech was overvalued

Today's global marco picture seems very similar but with some distinct differences. The Nasdaq QQQ seems even more grossly overvalued to me than it was in 2000 along with SPX. Interest rates have been cut to nothing already and quantitative easing is now a well established tool

China has also evolved at great deal in the last 20 years. It's exports of goods and services has now falling back to the pre-y2k level. The importance of this can't be understated as we enter this new commodity boom cycle. Note the spike in export goods

That boom saw countless western factories shutting down and moving to China. So, consider that really just shifted a lot of front end raw material demand. Yes, there was incremental demand growth in the west for raw materials but real driver was the new demand in China and India

During that crazy run up in commodity prices and global growth, there was considerable debate about how sustainable it would be and in particular lots of concern about the USA trade deficit with China and what the future would hold for the USD as the global reserve currency

I believe it was the first time I met Rick Rule in person that he gave a powerful speech at a commodity conference about the how the USA was "the mouth of the world" and China in particular had not choice but to feed it and that they 'needed' US dollars to be created and spent

As a Canadian, I've always felt like somewhat of confused bystander, when I hear American's joyfully gloat about how they can basically print hundreds of billions of fiat currency and exchange it with the Chinese for hundreds of billions in goods each year.

I imagine all the cargo ships loaded with amazing electronic goods, furniture and now vehicles, crossing the ocean after being manufactured in what we consider sweat shops. People working longer hours that westerners and 6 days a week, often living in factory owned housing

And having studied the mining industry, I imagine the labour and conditions of the workers that produce the raw materials for those goods often in 3rd world countries working in even worse and more dangerous living conditions.

I then contrast it with the root source of the funds, US government deficit spending supported by government appointed federal reserve officials with a mandate to print what ever is required to ensure and orderly financing of the government and banking system.

Basically a bunch of suits that can create billions or now trillions with a few strokes of a keyboard. It's madness, it's the biggest bubble of all and we all should know it's gonna end and be shocking to the 'system' when it ends. But, how and when?

Well, lets consider why first? Yes, China was willing to play along and take in the US Dollars but I've always believed it was just part of a 'long game'. They wanted the technology transfer and to also ramp up investment so they could build factories and cities and urbanize.

Well, this has been accomplished and as we can see from the early chart there domestic economy has grown substantially so that it's exports are now at a much more reasonable level. I believe at one point in the early days of China's growth the USA was over 1/3 of thier exports

A sharp contraction in exports to the USA would have had a material effect on their domestic economy and likely caused "unrest" as unemployment would have spiked and possibly led to political instability with in China. Here's some basic numbers from 2019 USA China trade

Amazingly, due to China's gap growth and export diversification to other countries other than the USA it's trade deficit with USA is only just over 2% of China's GDP now vs 10% plus in the early 2000's. Huge difference. In fact total exports from China to the USA is now ~3%

So,on to the punch line cause it's late on a Friday afternoon and I could go for a drink:) Bottom line, China has evolved to become it's own mouth. I no longer think anyone can argue that it needs to feed the USA, but instead it might be better off to starve the USA just a bit

Look back to the Arab sprint of 2012. Back then I argued that it wasn't a political uprising as was portrayed in the media. It wasn't that the citizens finally had had enough of dictators. I believe the catalyst was inflation from a USD pegged currency and high wheat prices etc

Egypt for exampled couldn't afford to import enough and keep it's people fed. Inflation hurts the poor the most and the Arab spring was sparked because the masses simply had so desperately poor that they were finally willing to risk their lives for change

This is the risk China sees now. It's said to have instructed it's provincial and business leaders to acquire commodities as required regardless of price. They clearly see what's happening with Coal, Oil, Gas and other key commodities. They don't want rolling blackouts

Winter is coming and they know power demand must be met. Factories must run as planned and the people need to keep working and eating. So, they are well aware of the move to Electric Vehicles and I'm sure their top consultants have done the math on the materials required

Copper, lithium, molybdenum, cobalt, nickel, rare earths, and yes... my favourite #uranium

China also has a massive "coal power" problem and the only answer is a massive build out of nuclear power which they are working towards. The global electrical grid needs to 2x in 20 yrs

I can't say enough how crazy that is...doubling the output of electricity in less that 20 yrs to feed electric cars! This is what we are trying to do while also cutting co2 emissions. That means producing more copper than we have in the history of the world

The resource bear market silenced a lot of resource experts and the few kicking around were pretty much ignored. So, listen up. I've done the math. Elon Musk did a bit of the math. He said, we need to double the global grid. He said we shouldn't be shutting down nuclear

But, those are easy things to say and not consider they math on how we are going to produce all the raw materials to accomplish this. I guarantee you the execs at the major auto companies haven't looked at where all the materials are going to come from

They will likely just try to contract for key ingredients and plug worst case scenario numbers into spread sheets that will end up being low baseline estimates. I'll continue on later to explain why this commodity boom will blow away all estimates do to many growth constraints

So to end off, I think China is going to start to unleash it's huge USD reserves finally and become increasingly unwilling to finance the USA trade deficit.Allowing commodity prices to rise in USD terms will help to curb USA consumption and make it easier for China to feed itself

Inflation is coming to America. It will not be transitory it will be permanent. American's will have to get used to working a lot harder for a lot less as they increasingly have to actually compete with the rest of the worlds work force.

The days living off trickle down economics, pouring out of a printing press that fuels massive government deficit spending, are ending. Standards of living will suffer as I expect no nation will soon be willing to give the USA hundreds of billions in free goods per year

The end of the USD as a reserver currency is upon us. For many it's going to be an extremely shocking and painful transition. Best prepare yourselves and your family for whats coming. I recommend deeply investing in the commodity sector if you have the funds or consider a career

Trading commodities to China for finished goods is a good prospect and also the Canadian way :) Have a good weekend